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FUTURES AND OPTIONS
Futures and Options make the major part of the stock market. Both Futures and Options are the product of Derivative segment. F&O came into place for the risk averse investors who were willing to enter the market only by minimizing the risk arising out of fluctuations in asset prices.
BSE is the originator for Derivatives in India, as it created history by launching exchange traded derivative in the year 2000 on 9th june. BSE commenced trading in Index Options on Sensex on June 1, 2001, Stock Options were introduced on 31 stocks on July 9, 2001 and Single Stock Futures were launched on November 9, 2002. MCX launched derivatives in Gold on the auspicious day of Dhanteras on 17th October, 2017.
Derivatives were the answer for risk averse investors. Derivatives became famous as they were able to partially or say fully transfer the risk by locking in prices, for the underlying asset, to be bought or sold in future.
Proof of the same can be witnessed on growing interest of retail investor into the derivative segment, amid edge of leverage it provides. In India, as per the data available, No. of contracts over derivatives in all segments, including stock future, index future and stock and index option, since the launch till date has grown by CAGR of 232.99%, where as turnover has grown up by 188%. Looking at the daily basis, daily average turnover including all the segments escalated by CAGR of 118.41%.
Derivatives segment does some of the economic functions as well:
* Prices of the underlying in the derivatives segment, reflects the prospective of the market participants about the underlying. Derivatives helps in finding the future and current market as well, as the prices of derivatives and the spot market converges on the expiration of the contract.
* Derivatives help in transferring risk.
* Derivatives have helped in increasing the trading volume. As investor who were otherwise shying away from market due to risk, now has starting participating in the financial market.
* Derivatives have helped in improving saving and investment because of rising number of participants in the market.
Let’s understand the major products of derivatives:
• FUTURES: It’s an agreement to sell or buy something at future date at pre decided price. Future contracts are registered over the exchange, acting as an intermediary, which makes the contract standardized and an agreement which can’t be modified. Exchange contracts come with pre defined size, format, price and expiration. As this contracts are traded over exchange, so they also have to follow the settlement procedure, i.e to settle gain and losses on daily basis, thus negating the chances of counter party credit risk.
• OPTIONS: Option contract, is different from forward and future contracts, as in these two types of contracts, both the parties are bound to perform their duties as mandated by the contracts. However an options contract, binds one party whereas it lets the other party decide at a later date. So, one party has the obligation to buy or sell at a later date whereas the other party can make a choice.
There are two types of options
* Call option : Call Option allows you the right but not the obligation to buy something at a later date at a given price whereas
* Put option : Put Option gives you the right but not the obligation to sell something at a later date at a given pre decided price.
Major underlying assets in futures and options are:
(Gold only in Option)
(Pairs available for future trading: USD/INR, GBP/INR, EUR/INR, JPY/INR)
(Pairs available for Option trading: USD/INR)
• Interest rates
Exchanges for Trading in Futures and Options
Time: 10:00 A.M. to 11:30 P.M/11:55PM
•BSE (For Stocks )
Time: 09:15 A.M. to 03:30 P.M
•NSE (For Stocks and Currency)
Time: 09:15 A.M. to 03:30 P.M
•NCDEX(For Agro Commodities)
Time: 10:00AM- 9:00PM (CPO, Cotton Soymeal, Soya Oil, Sugar )
Time: 10:00AM- 5:00PM (Agri Commodities)
MAJOR PARTICIPANTS IN FUTURES AND OPTION SEGMENT:
• Hedger: hedging refers to a position, to reduce the overall risk of the portfolio and refrain it from risky factors/influences coming from the current market situation. An individual who aims to reduce risk is usually called a hedger.
• Speculators: Speculators are the risk takers; however they try to project the prices, and take respective position in order to maximize the gains, by using technical and fundamental analysis.
• Arbitrageurs: Arbitrageurs are the individuals who take advantage of of market imperfections. Let say; sometimes the price of a share in the spot market may be below or may exceed its price in the derivatives market, thus arbitrageurs will take advantage of that price imperfection. They even play a key role in increasing the market’s liquidity.
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